WisdomTree is looking to add a new member to its fund family in
the floating rate treasury space. While an entrance in the fixed
income space comes as a shock at a time when the market is abuzz
with speculation that the taper will come in
following the Fed's Vice Chairperson (and likely future
Chairperson) Janet Yellen's dovish comments, a product exposed to
floating rate treasury bonds can turn out to be a good bet (read:
Time to Buy Floating Rate ETFs?
Proposed fund in focus
The proposed passively managed ETF,
via a recent SEC filing
, will trade under the name of the
WisdomTree Floating Rate Treasury Fund
, with broad exposure to the U.S Treasury market with a focus on
floating rate notes.
The proposed fund will follow the WisdomTree Floating Rate Treasury
Index that measures the performance of the market for floating rate
public obligations of the U.S. Treasury. The Index is market
capitalization weighted and is rebalanced on a monthly basis.
How might it fit in a portfolio?
At a time like this, investments in safer securities like U.S.
treasury bonds can be a good bet given the Federal Reserve's
ultra-low interest rate policy for the domestic economy (see
Time for Treasury Bond ETFs?
Although the scenario will likely remain unchanged for the near
future, it will be reversed when the Fed starts to scale back its
massive bond-buying program and interest rates start to creep up.
Investing in bond funds would then surely result in erosion of
In such a scenario, floating rate notes offer some cushion against
interest rate volatility. This kind of bond has variable coupons
indexed to a benchmark interest rate, such as LIBOR or Treasury
rate, plus a fixed quoted spread.
Due to their variable-coupon nature, these bonds are much less
vulnerable to increases in rates as opposed to the traditional
bonds with fixed rate coupons (read:
Floating Rate Bond ETF Investing 101
). Hence, this ETF, if ever approved, could be an interesting
option in an environment unsettled by the taper talk and the
resultant increase in interest rates.
There are ample choices either in the Treasury bond space or in the
floating rate corporate bond space. In Treasury bond space, options
iShares Barclays 1-3 Year Treasury Bond Fund
iShares Barclays 7-10 Year Treasury Bond ETF
iShares Barclays 3-7 Year Treasury Bond Fund
) and so on.
In the floating rate category, there are a handful of options like
iShares Floating Rate Note Fund
SPDR Barclays Capital Investment Grade Floating
) with a focus on floating corporate bond funds.
However, choices are almost non-existent in the floating as well as
U.S. Treasury space. In the case of U.S. treasuries, investors face
much fewer credit risks as the issuer here is the U.S. Treasury.
Quite expectedly, lower credit risks coupled with support
against interest rate volatility will be sought by investors in a
'QE taper' environment.
The growing investor interest for floating treasury funds can also
be felt from another filing from
State Street Global Advisors
. This fund from State Street will likely hit the market by January
2014 which might give the latest WisdomTree fund a fight for AUM
QE Tapering Could Make These Bond ETFs Winners
Given this, the proposed fund will have to sell its floating plus
treasury exposure criterion in order to stay competitive in the
space. While we don't think expense ratio will be much of an issue
for this unique type of fund, it would be better if the expense
ratio remains low, so as to attract new investors.
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